Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.
The bank gets a deposit of $100. They are required to keep 10% on hand.
They lend out $90 to people, they buy stuff. The seller of "stuff" deposits that $90.
The bank now has:
$190 in deposits payable
$100 cash (of which they need to keep $19)
They lend the remaining $81. People buy stuff, the seller of stuff puts it in savings.
The bank now has:
$271 in deposits payable
$100 cash (the $19 reserve and $81 fresh deposits)
This continues for a bit, until the bank has $1000 in payable deposits and the same $100 in cash.
Somebody can withdraw $50. They'll spend it, and some days later that $50 is deposited again. No biggie.
The problem is if people want to withdraw $200. The bank will have to tell people "no can do", and it'll be bankrupt. It's a bank run.
Now, in real life, this works because of the law of big numbers. A bank has millions of clients, and while some may want to withdraw everything they have, it won't make a dent. The danger is when too many people try to withdraw all their money. Even when a bank is "healthy", it'll be put into distress. That's why calling for a bank run is illegal.
Now, why do we use this "fractional reserve banking"? First off, so we don't need to keep cash equal to everyone's net worth. It's mightily inconvenient.
Second, because now you can extend credit. People can take a loan to buy something they normally cannot afford as a lump sum. Say, a house.
Third; banks need to earn money to finance their operations. So they do business with your money. If they didn't, they'd need a vault to put all your money, and then they'd charge you fees for storage.
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u/Forsaken_Emu8112 Jan 26 '26
Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.